Congress to Join Chorus in Digital-Music Debate

Bloodied by their battles with the record industry over digital music services on the Internet, technology companies, artists and consumer advocates are pleading for a new army to enter the fray--not attorneys, but lawmakers.

Washington has been waiting patiently for the conflicts over online entertainment to sort themselves out. But most of the action over the last year has been in court, not the marketplace, sparking consumer complaints, drawing the attention of antitrust officials and irking influential members of Congress.

The seeds of a legislative response could be planted today as the Senate Judiciary Committee holds hearings on the distribution of digital music and video. The hearing--featuring a grumbling group of rock stars, retailers and online entrepreneurs--is just the first of a series that committees on both sides of Congress are expected to hold this session.

On the eve of the hearing, three media conglomerates--AOL Time Warner, Bertelsmann and EMI--announced a potentially groundbreaking deal to distribute their artists’ songs through a new venture with RealNetworks Inc. of Seattle. The deal may undercut some of the arguments for congressional action, but it propels others.

“There are many, many questions that have to be asked and still have not been answered,” said Edward Murphy, chief executive of the National Music Publishers’ Assn.

In particular, digital music companies and retailers want Congress to ensure that the labels don’t cut sweetheart deals with each other and kill competition. Retailers also want to stop the labels from forcing consumers to disclose personal information, such as e-mail addresses, in order to download songs.

Consumer advocates, concerned that the public’s demand for online music isn’t being met, want Congress to force the labels to make their songs available digitally for a fee set by the government. Electronics manufacturers warn that the labels are trying to roll back consumers’ right to enjoy the music they buy when and where they choose. And recording artists want to be assured that they won’t be cut out of the digital-distribution pie.

The record labels, meanwhile, are playing defense. Officials at the Recording Industry Assn. of America say the labels are moving as fast as they can to provide copyright-friendly online music services, adding that the top priority for Congress ought to be fighting piracy.

“I am amused by those who suggest that record companies don’t want to be online with legitimate music,” RIAA Chief Executive Hilary Rosen said in testimony submitted to the Senate Judiciary Committee. “It is a ridiculous notion that should be given no credence by this committee or this Congress.”

The committee’s leaders, Orrin G. Hatch (R-Utah) and Patrick J. Leahy (D-Vt.), have prodded the labels publicly and privately to replace rhetoric with deeds. Rob Glaser, chairman and chief executive of RealNetworks, said his company’s deal with the three conglomerates could be a catalyst that makes all the labels more eager to embrace the Net.

“We are on a path to open this thing up that, two months ago, I would have thought was very unlikely to be achieved,” Glaser said. This progress, he said, stemmed mainly from the recent appeals panel’s ruling against Napster Inc. and the dot-com shakeout, not congressional pressure.

Some online companies were more inclined to see a connection between the Senate hearing and the announcement. “We should have hearings once a week from here on out,” said the chief executive at one Net music company, who asked not to be identified.

Under the agreement, AOL Time Warner, Bertelsmann and EMI each will own a minority stake in MusicNet, which will operate as an independent company. Tapping into RealNetworks’ core streaming technology, each label will license a “broad collection” of tunes that can be either downloaded or streamed off the Net, officials said.

Two of MusicNet’s first customers are Internet powerhouses America Online and RealNetworks, which expect to launch subscription music services late this summer.

Yet details of the new service remain unclear. No one knows what specific type of technology the service will use, whether consumers will be able to pull all their digital tunes off the PC and play them in other devices or whether the public will buy into the plan.

“Unless a service is priced reasonably and is easy to use, I don’t think any kind of subscription or downloading service will work,” said Phil Leigh, an analyst at Raymond James Associates Inc. investment bank in St. Petersburg, Fla. “Anything short of that, and it’s a play for the grandstand.”

The seriousness of such deals is just one of the issues facing legislators today. Others include:

* Mandatory licensing. Representatives of the Consumers Union and Napster argue that record companies should be required to make their catalogs available for online distribution at a preset fee. “When the marketplace isn’t working, you end up with no contracts, lots of litigation, and that’s exactly where we are,” Napster Chief Executive Hank Barry said.

On the other hand, some online entrepreneurs want some licensing penalty applied to Napster and other companies found by the courts to have violated copyrights.

* Discriminatory deals. Lobbyists for online music companies contend that Congress needs to protect against the major labels cutting more favorable music-distribution deals with each other than they do with third parties.

* Consumer privacy and recording rights. Some online retailers complain that most of the major labels are collecting e-mail addresses and other personal information from consumers who buy downloadable music without agreeing not to sell or disclose that information. “We made just no progress in protecting our customers, and as a result ourselves,” said Mike Farrace, senior vice president of digital business for Tower Records.

* Artist royalties and rights. Federal law guarantees recording artists a share of the fees that copyright holders collect from online radio broadcasts but not from other online ventures. A group of artists is lobbying to change that and to limit the number of years an artist can be bound to a contract. The hearing, which industry watchers say probably will be fiery, will include a veritable who’s who from the artistic, online and entertainment industries--from Richard Parsons, co-chief operating officer of AOL Time Warner, to MP3.com CEO Michael Robertson.

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